Markets at a Crossroad

Market action has been quite mellow but interestingly, sentiment has been, depending the metric you use, either very bullish or very bearish.

For example, the Dow just had its longest drop since ‘02. Yet, in percentage terms, the drop is only 10% and full of denial. Quite a shallow decline that doesn't match at all with the shape of the economy and doesn't even qualify for the term "correction".

June 10 (Bloomberg) -- U.S. stocks were headed for a sixth weekly drop, the longest slump for the Dow Jones Industrial Average since 2002, amid concern the economy is slowing.

From one side, the Put Call ratio is showing panic, but from the other side the VIX is merely trading at 18, a very low reading.

The AAII Sentiment Indicator is very depressed, yet the outflows from the equity funds are very shallow (see charts and reading from Trader's Narrative).

Sentiment is supposed to be very bearish, yet the IPO fever and craze doesn't stop, Bubble 2.0 is being blown, analysts and strategists expectations are still high and year end targets for equity markets and commodities are still 20% above the current levels...

Moreover, US Dollar and Treasuries are still extremely negative. For the first time in years, a decline in markets has been happening with a drop in the Dollar. Quite amazing.

So where will the market go from here?

Hard to tell. During the past 2 years, every time there has been so much pessimism, markets have rebounded. But it's also about time this dead cat bounce stops, in which case, we might have a real drop. Options are open... Markets have to decide which way yet...